Facebook Inc (FB) Earnings Preview: Focus On Ad Revenue Growth

Facebook Inc (NASDAQ:FB) is scheduled to release its next earnings report after closing bell tonight. The social network faces difficult comparisons for the third quarter because mobile ad revenue growth could slow down year over year. Because of this potential slowdown, Stifel analysts think investors will especially be focusing on ad revenue growth.

However, Facebook Inc (NASDAQ:FB) does still stand a chance at beating ad revenue estimates, based on the latest data from Nanigans.

Facebook (FB) trends from Nanigans

In its latest report, the firm said Facebook Inc (NASDAQ:FB)’s three main direct response ad types led the way, with Unpublished Page Post Link Ads, Mobile App Install Ads and Domain Ads making up 95% of all the ad spending on the social network. Nanigans also saw a continued upward trend in mobile ad spending, which made up 62% of total ad spending on Facebook.

In addition, the firm reported a continued increase in global click-through rates in both social and mobile. They increased by 195% year over year, hitting a .56% average in the third quarter. Cost per click fell sequentially but rose 30% year over year to 53 cents.

Effective cost per impression and click-through rates also increased in the third quarter, although average cost per click fell a bit. Nanigans said this suggests that demand for ads on Facebook and also performance of those ads is still growing. The firm added that even though advertisers are paying more per thousand impressions, they’re still seeing more engagement and clicks for lower costs.

What to expect in Facebook’s earnings report

In a report dated Oct. 27, 2014, Sterne Agee analysts Arvind Bhatia and Brett Strauser said they think the digital ad industry is growing faster than they thought previously. They also see Facebook as the main beneficiary, as it appears that the social network is still gaining share.

They’re looking for monthly average users of 1.35 billion, mobile monthly active users of 854 million and daily active users of 1.12 billion. They expect engagement to remain flat at 63%. They want to see $3.04 billion in revenue and $1.91 billion in adjusted EBITDA. The consensus estimate for revenue is $3.12 billion and for adjusted EBITDA is $2.02 billion.

The Sterne Agee team wants to see mobile ad revenue be 66% of total revenue, an increase from 62% in the previous quarter.

Options suggestions for Facebook (FB)

In a separate report dated Oct. 27, 2014, Stifel analysts Brian Donlin and Frank Poerio offered some ideas for options trades on Facebook Inc (NASDAQ:FB). They said recent options activity suggests that the social network’s shares could move by 7.52%.

One suggestion they make is to sell the Oct. 31 71.5 strike put for 57 cents and buy the Oct. 31 81 / 85 strike call spread for $1.57. They explain that this is executed by selling the Oct. 71.5 strike put for 57 cents, buying the Oct. 81 strike call for $2.40 and then selling the Dec. 85 strike call for 83 cents. The cost of this option is $1.

A second options strategy is to sell the Dec. 70 / 90 strangle against the long stock for $2.40. They like this one because investors can benefit if there’s a selloff due to implied volatility.